Dealing with the financial aspects of a natural disaster

The term "100-year flood" or "100-year hurricane" means that there is a 1 percent probability that catastrophic weather events will happen, or an average of once every 100 years.

That is a very small probability and the odds are good that it won't happen during your lifetime. But talk to anyone who has lived through a natural disaster and you will find that, when these events happen, they cause a great deal of emotional and financial distress.

This article provides specific actions to address the financial aspects of a natural disaster.

Before a disaster

º Inventory personal possessions and take photographs of them or make a videotape. Store this documentation in a safe deposit box and/or an online cloud server.

º Keep important family documents, such as car titles, deeds, stock certificates, and birth certificates in a bank safe deposit box with a copy on a flash drive and/or an online cloud server.

º Prepare an "evacuation box" to grab in the event of an emergency. Contents should include a small amount of cash; a list of emergency contacts, doctors, and financial advisors; copies of important prescriptions and immunization records; copies of auto and homeowner's policies and insurance company telephone numbers; backups of computerized financial records; and a safe deposit box key.

During a disaster

º Reach out for local help. The American Red Cross can provide emergency shelter, meals, clothing and medical assistance. Churches, interfaith coalitions and government emergency management agencies may also be able to assist with food and water, evacuation, shelter, and hygiene items.

After a disaster

º Contact the Federal Emergency Management Agency. Federal funds are distributed after the governor and president declare an area a federal disaster area. Grants and loans are determined on a case-by-case basis, depending on factors such as financial need. FEMA grants, as well as funds provided by charitable relief agencies, are not considered taxable income.

º Consider a loan. Low-interest disaster loans of up to $200,000 are available to home and business owners, farmers, and others with personal property losses. Administered by the Small Business Administration, they provide funds for rebuilding and/or modifying buildings to help withstand future damage.

To receive federal disaster aid, victims must apply and receive a registration number, which is required to make a claim. An emergency hotline number and temporary field office are generally available to facilitate claims. For more information, visit https://disasterloan.sba.gov/ela/.

º Notify your employer immediately if you are unable to get to work because of a natural disaster (For example, flooding destroys your car or you are waiting for an inspector). Most employers will be sympathetic and allow employees who are disaster victims to take paid or unpaid leave time to deal with the situation.

º Notify creditors as soon as possible. Explain the situation and try to negotiate a delayed or reduced payment. Reduce household spending to free up funds for disaster-related expenses. If you can pay some bills, but not all, set priorities, starting with bills that cover basic needs (food, shelter, utilities), have the highest interest rate, or cost the most to postpone (For example, late fees on credit cards).

º Notify utility companies (For example, electric, phone, cable) if your home is uninhabitable or has been totally destroyed so that they can stop billing immediately. Also request that they waive initial connection charges if service is transferred to a new address.

º Call your insurance agent immediately. Don't wait for floodwaters to recede. Find out exactly what information is required. Leave a phone number (For example, friend's house or cell phone) where you can be reached by an adjuster if your home is uninhabitable.

º Begin cleaning up as soon as possible. Don't wait for an adjuster. However, take photos before cleaning up to document your loss.

º Separate damaged and undamaged property but don't destroy damaged items until a claims adjuster inspects them. If you have material that you would like to remove immediately because it could be a health hazard, call your insurance agent for instruction.

º Protect your property from further damage by making temporary repairs (For example, using a tarp to cover roof or window damage). Save all receipts for reimbursement. Even if your insurance doesn't fully reimburse you, you may qualify for an itemized deduction for federal income taxes.

º If your home is uninhabitable, save all receipts related to temporary lodging and meals.

º Make a list of damaged articles and provide any other information that the adjuster requests to process your claim. Keep copies of all information provided to the insurance company.

º If post-disaster looting should occur, report any thefts to local police.

º Review the settlement process outlined in your insurance policy. If you're dissatisfied with a proposed settlement offer, negotiate for a higher amount and/or submit the dispute for arbitration.

Post-disaster income tax relief

º Take advantage of income tax relief opportunities to alleviate financial stress. Historically, the Internal Revenue Service has provided several types of tax relief to taxpayers affected by natural disasters. Some examples are automatic extensions of time for filing tax returns and paying taxes and waived penalties for late filing of returns and payment of taxes.

º Calculate your best casualty loss scenario. In areas that the president has declared to be federal disaster area, taxpayers have the option of taking their entire loss on their prior year's tax return. If they have already filed a prior year return, they can file an amended return (use Form 1040X) to get a refund promptly to pay disaster-related expenses without having to wait.

To speed the processing of disaster area returns, taxpayers should mark in red, bold print "Disaster, County of ___" at the top of the form.

º Remember that only uninsured property losses are tax deductible. Disaster victims who receive insurance or another type of reimbursement must subtract the reimbursement when they figure their loss.

º Remember, too, that there are limitations on the amount of a loss which is deductible. First, since casualty losses are deducted on Schedule A as an itemized deduction, you must be able to itemize in order to take a casualty loss. Taxpayers who claim the standard deduction are ineligible.

Second, for non-business property owned by individuals, the first $100 of loss is nondeductible. A disaster is usually treated as a single casualty and the $100 rule applies only once. The remainder of the unreimbursed loss is allowed only to the extent that it exceeds 10 percent of a taxpayer's adjusted gross income after being reduced by any insurance compensation.

º Know the tax rules. Withdrawals from a tax-deferred IRA before age 59½ to pay disaster expenses are subject to a 10 percent penalty and ordinary income taxes. There is no provision for a disaster waiver.

The destruction of one's home and personal property is a traumatic experience, both psychologically and financially, but there are ways to minimize the stress.

First, don't panic. Give yourself time to get over the initial shock and then start making plans. Don't blame yourself or anyone else. Just concentrate on dealing with the situation. Recognize that your life will be different, at least for a while, but that you can still take steps to take control of your household finances.

Barbara O'Neill, an Andover Township resident, is extension specialist in financial resource management for Rutgers Cooperative Extension. She can be reached at 848-932-9126 or oneill@aesop.rutgers.edu. She also tweets daily financial education messages on Twitter at http://twitter.com/moneytalk1.

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